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A company shares pay an annual dividend of $10 this year (D0 in the textbook) and promises that its dividend will grow at a rate of 4% per year for the indefinite future. The risk-free interest rate is 3%. However, an asset holder requires a risk premium of 5%. The current price of the shares of this company is $200 a share. The asset holder has $20,000 free cash that he wishes to invest.
Should he invest in this company?
Consider a project to supply 109 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,990,000 five years ago; if the land were sold today, it would net you $2,190,0..
Stock A's expected return and standard deviation are E[RA] = A = 6% and A = 12%, while stock B's expected return and standard deviation are E[RB] = B = 10% and B = 20%. How would you construct a portfolio with expected return of 8% using stock A and ..
Rich and Shauna Nielson file a joint tax return, and they itemize deductions. Assume their marginal tax rate on ordinary income is 25 percent. The Nielsons incur $2,700 in miscellaneous itemized deductions, excluding investment expenses. What tax sav..
Suppose that the inflation rate is 2.5% and the real terminal value of an investment is expected to be $20,000 in 2 years. Calculate the nominal terminal value of the investment at the end of year 2.
Consider a project to supply 119 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $2,090,000 five years ago; if the land were sold today, it would net you $2,290,0..
The covariance between stock A and stock B is 0.02. The standard deviation of stock A is 12% and that of stock B is 25%. Calculate the correlation coefficient between the two securities.
A firm has decided to renew part of its production process by acquiring a new and more efficient machine at a cost of $24 million which can be depreciated on a linear basis over 4 years. At the end of the project, the resale market value of the machi..
What is the 95% VaRfor the following portfolio given that you know Mu(dr) = 0 and sigma(dr) = 0.3876%? 1 unit of 4.75-year, 6.9% coupon bond paying semiannually. Note, for the dollar amount invested in each part of this portfolio, use the price of ..
Using Modigiliani and Miller’s Proposition II, determine the required return on unleveraged equity. Evaluate why violations of the Modigiliani and Miller assumptions of perfect markets require revisions to your capital budgeting analysis.
HexChat, Inc. has issued 17 year bonds 5 years ago. The bonds pay semiannual coupons, with a coupon rate of 5.8 percent, and $1000 face value. If your required return on this investment is 9.8 percent APR, how much would you be willing to pay for thi..
Expiration dates in the option market
Pamela earns a yearly salary of $150,000. During year 1 she invested $80,000 for a 20% interest in a passive activity. In addition, her share of the activity’s nonrecourse debt is $20,000. Operations of the activity in year 1 resulted in a loss of $5..
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